Monday, January 09, 2012
2:59 AM

Since 2008 I have been stating the US would have "Structurally High Unemployment for a Decade".

Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially "low" 8.5% (not that 8.5% is anything to brag about).

To show how difficult it will be to bring that rate down, let's take a look at job growth (or losses), for the last three decades (numbers in thousands).

1970's Job Growth

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Avg

1970

-64

126

151

-105

-226

-94

27

-123

17

-430

-110

381

-38

1971

76

-61

54

178

210

6

63

52

252

22

202

264

110

1972

337

207

293

218

304

293

-51

428

131

404

293

305

264

1973

350

397

269

170

190

240

25

255

115

324

304

126

230

1974

69

149

42

89

163

55

32

-15

-5

13

-368

-602

-32

1975

-360

-378

-270

-186

160

-104

249

386

78

303

144

338

30

1976

489

311

232

244

18

65

170

158

188

13

332

211

203

1977

244

295

404

339

359

399

348

238

458

262

379

235

330

1978

187

353

513

702

346

442

254

276

137

336

437

283

356

1979

137

243

426

-62

372

318

106

82

27

157

94

95

166

Decade Annual Avg

162

1980's Job Growth

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Avg

1980

131

79

112

-145

-431

-320

-263

260

113

280

256

195

22

1981

95

67

104

74

10

196

112

-36

-87

-100

-209

-278

-4

1982

-327

-6

-129

-281

-45

-243

-343

-158

-181

-277

-124

-14

-177

1983

225

-78

173

276

277

378

418

-308

1114

271

352

356

288

1984

447

479

275

363

308

379

312

241

311

286

349

127

323

1985

266

124

346

195

274

145

189

193

204

187

209

168

208

1986

123

107

93

188

125

-93

318

113

346

187

186

204

158

1987

171

232

249

338

227

171

346

170

229

492

231

294

263

1988

94

452

276

245

227

363

223

121

340

268

339

289

270

1989

262

258

192

173

118

117

39

47

249

111

277

95

162

Decade Annual Average

151

1990's Job Growth

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Avg

1990

342

245

215

40

149

17

-42

-208

-82

-161

-144

-60

26

1991

-119

-306

-160

-211

-128

87

-47

15

35

12

-58

23

-71

1992

49

-66

50

158

126

60

71

141

35

177

140

211

96

1993

310

242

-51

309

265

173

295

161

241

277

261

308

233

1994

268

201

462

353

331

315

363

300

354

207

423

274

321

1995

321

209

222

162

-16

231

79

271

245

147

148

131

179

1996

-19

434

263

161

323

278

232

196

220

243

296

167

233

1997

230

301

312

291

256

253

283

-18

508

339

303

299

280

1998

270

189

144

277

401

212

119

352

218

193

284

342

250

1999

121

410

106

376

213

266

291

192

202

408

294

294

264

Decade Annual Avg

180

2000's Job Losses!

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Avg

2000

249

121

472

286

225

-46

163

3

122

-11

231

138

163

2001

-16

61

-30

-281

-44

-128

-125

-160

-244

-325

-292

-178

-147

2002

-132

-147

-24

-85

-7

45

-97

-16

-55

126

8

-156

-45

2003

83

-158

-212

-49

-6

-2

25

-42

103

203

18

124

7

2004

150

43

338

250

310

81

47

121

160

351

64

132

171

2005

136

240

142

360

169

246

369

195

63

84

334

158

208

2006

281

317

287

182

11

80

202

185

156

-8

205

180

173

2007

203

88

218

79

141

67

-49

-26

69

91

127

84

91

2008

13

-83

-72

-185

-233

-178

-231

-267

-434

-509

-802

-619

-300

2009

-820

-726

-796

-660

-386

-502

-300

-231

-236

-221

-55

-130

-422

Decade Annual Avg

-10

2010's Job Growth

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Avg

2010

-39

-35

192

277

458

-192

-49

-59

-29

171

93

152

78

2011

68

235

194

217

53

20

127

104

210

112

100*

200*

136

* : preliminary

108

Bear in mind those tables are from the BLS establishment survey data while the unemployment rate is based off a phone survey. Nonetheless, with sufficient time (and BLS revisions), the results merge.

According to Fed chairman Ben Bernanke (and I believe he is correct on this point) it currently takes about 125,000 jobs a month to hold the unemployment rate steady, down from about 150,000 in 2000. I expect that number to drop for a few more years due to boomer demographics, but the key point is the number is positive not negative.

The only reason unemployment rate has dropped recently is because BLS surveys say the number is negative (a shrinking labor force).

Based on historical data and Bernanke's estimates, one would have expected the unemployment rate to have risen during 2010 and peaked mid-2011. Instead, the unemployment rate fell from 10 to 8.5.

If you take a look at the actual number of those "counted" as employed, that number has risen from the recessionary trough. However, in reality, employment is still far below the long term historical trend. Currently, the deviation from the long term trend is the widest on record and has made very little improvement.

In order for the country to return to the long-term trend of employment by 2020, we will need to be creating nearly 250,000 jobs each month. This, of course, is a far cry from 200,000 that we saw this month. With the employment-to-population ratio remaining at levels not seen since 1984, the real pressure on the economy remains focused on the consumer.

There are two very negative ramifications of this large and "available" labor pool. The first is that the longer an individual remains unemployed, the more the degradation in job skills weighs on future employment potential and income. The second, and most importantly, is that, with a high level of competition for existing jobs, wages remain under significant downward pressure.

Business owners are highly aware of the employment and business climate, and regardless of the ranting and raving about the "cash on the sidelines", businesses are not operated as charities. Business owners are milking the current employment climate for all it is worth in order to maintain profitability. With high competition levels for existing jobs, and the impeding threat of job loss for those working, employers can work employees longer hours at less pay. This is great for profit margins, and workers won't complain because there are plenty of individuals that will be happy to take their job and do it for less pay.

This impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the fact that recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is unsustainable, and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.

On today's labor report: Note how the labor force has flat lined for four years even though population growth has averaged 1.5 million for the past 55 years. From 1993 to 2007 population growth was 1.7 million per year!

Thus, the labor force should not suddenly turn flat since retirements do not even come close to explaining the chart. Yet, suddenly the work force has just been frozen in time although the population continues on the same upward trend.

The work force is literally one million smaller than during Bush's last year in office. This is statistically impossible, at least judging from historic trends.

We also are still 5.6 million people below the employment number of the peak year in 2007. So, practically speaking we have approximately 11.6 million more people unemployed than in 2007.

If we add the additional 6 million that should be counted as available for the labor force, the unemployment number at the U-3 level surges past 11% as you have said numerous times.

As of December, our nation continues to face a “jobs gap” of 12.1 million jobs, down by 67,000 jobs from November.

The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2024—over 12 years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by February 2017—not for another five years.

Statistically Impossible IFs.

Based on the data tables from the BLS that I posted at the top of this article, each of those dashed line in the above chart represents a statistically impossible IF.

The economy is certainly not going to average 472,000 jobs per month for two years. Nor will it add 321,000 jobs a month for six straight years. Finally, the economy is not going to add 208,000 jobs a month, every month, for the next 12 years.

Indeed, one cannot find any 10-year period in which the economy added that number of jobs. The best 10-year period I can find is 195,000 jobs per month from 1991-2000, overlapping decades by 1 year (during the internet boom with hugely falling interest rates and Greenspan's foot on the gas pedal nearly every step of the way).

Fundamental Case for Structurally High Unemployment

At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.

At the height of the housing bubble in 2005, the economy added 208,000 jobs a month.

At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 91,000 and 173,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution.

Moreover, debt levels are high and millions are trapped in their homes, unable to move. Boomers in retirement or headed for retirement have insufficient savings so one cannot expect a spending boom of any kind. Instead, one can expect boomers to draw down on their savings (assuming that have any savings).

In conclusion, the only way the unemployment rate can substantially decline from here is if millions more drop out of the labor force, thereby creating an even bigger "gap" between reality and the BLS's alleged unemployment rate.

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